Tax Justice Digest stories about Tax Collection

Tax Day Bill Approved by the House Would End IRS's Use of Private Debt Collectors

April 18, 2008 2:53 PM | Permalink

The House of Representatives approved a bill on "tax day" that would end the IRS's use of private debt collection agencies to locate unpaid taxes. The Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) would ban the federal government from entering into new contracts with the private collectors and the extension of the existing contracts with two companies. (A third company, a scandal-plagued firm based in Texas, was dropped from the program for reasons the IRS would not make public). Similar legislation was passed by the House last year but the Senate did not act.

The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

In the Senate, Byron Dorgan (D-ND) has introduced legislation (S. 335), with 23 cosponsors, that would end the private debt collection program. However, the Senate Finance Committee chaired by Max Baucus (D-MT) has not yet acted, and the committee's ranking Republican, Charles Grassley (R-IA) has been particularly vocal about allowing the private debt collection companies, one of which is based in his state, to continue the work for IRS.

The Congressional Budget Office and the Joint Committee on Taxation have estimated that ending the private debt collection program will cost over half a billion dollars over a decade (since that's the net revenue the private companies would collect if allowed to continue). Of course IRS employees could collect much more for the same level of funding, but the budget "scoring" process does not treat funding for the IRS in a manner that accounts for the vast return on every dollar spent on tax collection.

As a result, the House had to come up with provisions that would raise revenue to offset the costs of the bill. One would require that people using money from a health savings account (HSA) provide more evidence that the money was used for a medical expense. HSAs, introduced as part of the Medicare prescription drug law in 2003, are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan (plans with deductibles of at least $1,050 for an individual or $2,100 for a family). One fear health care advocates have about HSAs is that they will, over time, encourage healthier and wealthier people to leave the traditional health insurance market, which will make health insurance even less affordable for those at-risk workers and families who really need it. A fear tax fairness advocates have is that HSAs are just a way for better off people to shelter money from taxes. The deduction is worth the most to well-off families who will likely have health insurance with or without a tax incentive.

Another revenue-raising provision in the bill would close a tax loophole that is used by Kellogg Brown & Root (KBR), which until last year was a subsidiary of Halliburton. As we explained a month ago, KBR used the loophole to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

Both of these are provisions that would be worthy even if Congress was not trying to raise revenue and they make the overall bill even more praiseworthy. Predictably, the President has threatened again to veto any legislation that ends the private debt collection program, in line with a pattern of positions that choose the private sector over the public sector even in situations in which the latter is able to operate far more efficiently.

Report Details How Lack of Tax Enforcement (Especially for Wealthy Individuals and Large Companies) Is Costing Us

February 1, 2008 4:27 PM | Permalink

Often lost in the debate over whether taxes should be increased or decreased is the fact that we can raise some revenue by doing a better job of enforcing current tax laws. A report issued earlier this month by OMB Watch explains that a lack of funding for tax enforcement by the IRS is costing us money and contributing to the "tax gap," the difference between the amount of taxes owed and the amount actually paid each year. The IRS has estimated that in 2001, $345 billion in taxes due was not collected on time, and around $290 billion of that was never collected. This means that taxpayers who comply with the law are in effect subsidizing those who do not.

The report, Bridging the Gap: The Case for Increasing the IRS Budget explains that IRS staff have been cut back since 1995 and that cuts have been especially severe among the staff who perform audits. Partly as a result of this, the number of audits is down, particularly for those with incomes over $100,000 and for large corporations -- the very types of audits that usually uncover the most in unpaid taxes. The amount of time spent on each audit has decreased and the audits are less often uncovering unpaid taxes, even though the tax gap remains a major problem.

Meanwhile, the report explains, Congress has instructed the IRS to crack down on EITC recipients (even though incorrect EITC payments account for only 3 percent or less of the tax gap) and has funded a private debt collection program that doesn't collect nearly as much money as IRS staff can collect at a given funding level.

The report argues that this situation can be turned around by increased funding for IRS enforcement, improved quality of audits, eliminating private debt collection and focusing more on assisting low-income taxpayers so that they can avoid errors in the extremely complicated EITC application process. Congress should pay serious attention. Increasing the IRS budget is one of the few opportunities lawmakers have to immediately raise revenues by spending money.

House Votes to Kill IRS's Use of Private Debt Collectors

October 12, 2007 3:46 PM | Permalink

The House of Representatives voted Wednesday to ban the IRS from using private debt collectors to help collect delinquent taxes after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

The Senate Finance Committee has not taken up the private debt collection issue although there is a bill (S. 335) sponsored by Senator Byron Dorgan (D-ND) to end the program. Meanwhile, the White House has threatened to veto the House bill (H.R. 3056) if enacted because it will cost the federal government revenues "that are otherwise not likely to be collected by the IRS."

This argument is ridiculous. The ten-year projected cost of the measure is just over $1 billion and that cost is offset in the bill with revenue-raising provisions. But the more fundamental point is that this measure should not be scored as costing anything at all. When Congress cuts back the tax enforcement staff at IRS, this reduction is not counted as a "cost" even though IRS personnel actually collect a lot more in taxes than do the private debt collectors. The private debt collection program seems driven by the ideology that the private sector always works better, even when the facts clearly state otherwise.

Would We Want a Firefighter to Have a Part-Time Job as an Arsonist?

September 21, 2007 12:42 PM | Permalink

Top White House Economic Adviser Involved in Patenting Strategies to Avoid Taxes

Tax Notes, a trade journal for tax experts (sorry subscription required), reports that Edward Lazear, chairman of the President's Council of Economic Advisers, is named on a patent application for a product to help companies avoid taxes. The application was filed 10 months after Lazear began working at the White House.

The White House says that, essentially, Lazear's work on the product ended before he came to the White House. Whatever the case may be, it certainly highlights questions over whether tax strategies should be patentable at all. A patent reform bill in the House of Representatives includes provisions that ban patents on tax strategies. Senators Max Baucus (D-MT) and Charles Grassley (R-IA), chairman and ranking member of the Finance Committee, plan to craft a bill that would ban tax patents as well. A bill introduced by Senators Carl Levin (D-MI), Barack Obama (D-IL) and Norm Coleman (R-MN) in February to target offshore tax avoidance also bans tax patents.

As Levin pointed out when he introduced his bill, patent law exists to encourage innovation. There is no lack of innovation when it comes to avoiding taxes and there is certainly no public policy reason to encourage it.

House Committee Votes to End Outsourcing of Tax Collection

July 20, 2007 12:47 PM | Permalink

The House Ways and Means Committee approved a bill (H.R. 3056) on Wednesday that would end the IRS's use of private debt collectors after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate.

Unfortunately, earlier efforts to kill the program in an appropriation bill failed on procedural grounds. Part of problem stems from a peculiar wrinkle in the pay-as-you-go (PAYGO) rules that were revived earlier this year by Congress. Ending the private debt collection program counts as a "cost" to the federal government under these rules, since the private agencies are expected to collect over a billion dollars over the next decade if the program is allowed to continue. As a result, the Ways and Means bill just approved includes over a billion dollars of revenue-raising provisions to offset the "cost." The biggest offset would collect $764 million over ten years by making it harder for people to get out of paying their federal taxes by renouncing their U.S. citizenship.

But it's absurd that killing the private debt collection program should have to be paid for. Cutting funds for traditional tax collection by the IRS is not counted as a "cost" under budget rules that Congress has to offset with revenue-raising provisions. And traditional tax collectors at the IRS bring in a whole lot more money than these private contractors ever will. The legislative recommendations made by the National Taxpayer Advocate in January start out by noting that on a budget of just over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one.

In the Senate, a bill (S. 335) sponsored by Byron Dorgan (D-ND) would end the private debt collection program, but it's not clear when this bill will be considered.

House Appropriators to Pull the Plug on Outsourcing Tax Collection

June 22, 2007 12:50 PM | Permalink

The House Appropriations Committee approved the "Financial Services" spending bill last week, which includes funding for the IRS and other agencies within the Treasury, as well as for the District of Columbia and several other agencies. Notably, the bill includes language that limits funding of tax debt collection by private collection agencies to $1 million, effectively killing the IRS's practice of outsourcing tax collection.

The IRS's private debt collection program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate.

Tax Day in Congress

April 20, 2007 12:52 PM | Permalink

House of Representatives Uses Tax Day to Approve Taxpayer Protections

The U.S. House of Representatives approved H.R. 1677, the Taxpayer Protection Act of 2007, on Tuesday, Tax Day. As we've explained before, the bill includes several provisions geared towards protecting taxpayers from fraud, identity theft, and predatory banks offering refund anticipation loans (RALs) which often come with interest rates around 90 percent. Interestingly, a provision preventing the IRS from handing over information about people's tax debt to such predatory banks was opposed vigorously by Jackson Hewitt, the tax preparation company, when the bill was in committee. In the past two weeks, the Department of Justice has been trying to shut down around 125 Jackson Hewitt offices in which the owners are accused of fostering an environment "in which fraudulent tax return preparation is encouraged and flourishes."

Congress Mulls Several Proposals to Protect Taxpayer Rights

April 6, 2007 12:55 PM | Permalink

Members of Congress are currently considering a series of proposals meant to strengthen taxpayer rights. The latest of these, the "Taxpayer Protection Act of 2007" (H.R. 1677) was approved by the House Ways and Means Committee before it adjourned for the Congressional recess. It includes provisions that would

- prevent the IRS from giving third parties information about taxpayers' tax debts,

- require the IRS to notify taxpayers in cases where identify theft may have occurred,

- notify taxpayers that they may be eligible for the EITC,

- clarify rules that prevent deceptive use of the IRS's name (targeting websites like www.irs.com that people may believe belong to the IRS itself.)

Of particular note is the provision preventing the IRS from sharing tax debt information with predatory banks marketing refund anticipation loans (RALs). The IRS and some members of the committee argue that it would actually be in the taxpayers' interest to provide banks information helping them to determine whether a taxpayer is likely to repay a loan, and that without this information the interest rate on such loans could be higher to reflect that lack of certainty about repayment. But the provision targets those that are "predatory," which is not defined in the legislation. RALs sometimes have an interest rate around 90 percent.

We Should Be Able to File Our Taxes Online Easily — Without Paying a Tax Preparation Firm

Another taxpayer rights-related bill (S. 1074) has been introduced in the Senate by Daniel Akaka (D-HI) to create a single internet portal that can be used to file taxes online directly with the IRS for free. Currently people who file online must use the services of one of several companies that charge a fee for those with incomes above $52,000 and which subject users to advertisements for other products.

Outsourcing of Tax Collection in Congress's Crosshairs

A third bill in the area of taxpayer rights is the legislation introduced in the House and Senate (H.R. 695/S. 335) that would end the IRS's use of private debt collectors. The program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. Since the private contractors are paid on a commission unlike IRS employees, there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate. If you haven't already, send your members of Congress a quick email in support of the legislation to end this program.

Our Going-Away Present from the Republican-Controlled Congress: An Unbelievably Confusing Tax Form

March 9, 2007 12:58 PM | Permalink

This year our federal tax forms are incredibly confusing, but it's not the IRS's fault, and it's not something that is going to be solved with the latest regressive "flat tax" plan. Rather, this year's tax filing confusion is caused by the previous Congress, which in the months before the Republicans lost power, procrastinated as long as possible before extending several tax deductions and credits. At that point it was too late for the IRS to include these deductions and credits on the tax forms, which were already printed and distributed. (To be honest, Citizens for Tax Justice has never been fond of these particular tax provisions, the "tax extenders," but we'd rather they be enacted permanently or not at all, as opposed to having Congress revisit them every couple years and spending endless amounts of time that could be applied to more pressing matters.)

Let's say you have kids in college. The general instructions say that the tuition deduction is expired but may have been extended and refers you to the IRS's web site. The 1040 (printed and on-line) has nothing about the tuition deduction. If you go to the website and look under "What's Hot" you find not a word about the tuition deduction. If you search further you can find information about changes in tax laws that apply and you discover that to take the tuition deduction, you go to line 35, which is for something called the "domestic production activities deduction" and write a "T" on the line if you're taking the tuition deduction. If you happen to be taking the domestic production activities deduction and the tuition deduction, you write "B" on the line for "both." Similar instructions are given for those taking the educator expenses deduction, the DC first-time homebuyer credit and the state and local sales tax deduction.

The good news is that this confusion could create support for tax reform and simplication. The bad news is that a lot of the plans peddled as "tax simplification" do not focus on simplification, but rather remove the progressive rates which have nothing to do with this confusion. (Tax tables are provided to tell you how much you actually owe after you work through all these deductions and credits). Our current President has persuaded Congress to enact six tax break bills in six years — but none have simplified our tax code. Broad tax reform might be a good idea — in 2009.

CTJ Online Letter Campaign Aims to End IRS Use of Private Collection Agencies

February 23, 2007 1:00 PM | Permalink

CTJ Online Letter Campaign

Citizens for Tax Justice has begun a letter campaign targeting Congress in support of legislation to end the IRS's use of private collection agencies to locate delinquent taxpayers, which began last fall. Click here to send your members of Congress a letter in support of these bills, which have been introduced by Representative Van Hollen (D-MD) in the House and Senator Byron Dorgan (D-ND) in the Senate.

One problem with the program is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while IRS employees could do the same work for just 3 cents for every dollar collected. It is also feared that the private debt collectors, driven by large profits, will have a greater incentive than IRS employees to violate the privacy rights of taxpayers in order to increase collections.

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